Croatia in 1998

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The year 1998 began well for Croatia with the return of eastern Slavonia to full Croatian sovereignty on January 15, ending six years of Yugoslav military occupation and United Nations administration. UN forces were replaced by observers from the Organization for Security and Cooperation in Europe, who were mandated to oversee the return of Serbian and Croatian refugees. Though progress was indeed made on Serb refugee returns, Croatia was again denied entry into the European Union’s aid program because of the government’s failure to liberalize the state-controlled electronic media and to change electoral laws favouring the ruling Croatian Democratic Union (HDZ).

In January the government sold a controlling stake in the largest daily newspaper, Vecernji list, to a secret owner believed to be close to the ruling party. The appearance on April 6 of the country’s first independent daily, Jutarnji list, however, promised to challenge the government’s grip over the print media; the paper’s circulation approached that of Vecernji list by the year’s end.

Tensions between moderate and authoritarian elements within the ruling party came to the fore on September 25 when Pres. Franjo Tudjman’s Chief of Cabinet Hrvoje Saranic publicly attacked presidential adviser Ivic Pasalic for using the intelligence services and the media to attack political opponents. Saranic later resigned in protest against Tudjman’s refusal to stop this practice. The collapse in April of the state-controlled Dubravacka Banka, one of the largest banks, exposed the corrupt relationship that existed between the banking sector and party officials and their business allies. The banking scandal brought down the local HDZ-run government in Dubrovnik and initiated a nationwide banking crisis that caused a number of banks to seek government assistance in order to avoid bankruptcy.

The liquidity problem afflicting the economy was blamed on the government’s tight fiscal and monetary policies, highlighted by the introduction at the beginning of the year of a single-rate value-added tax (VAT) that replaced the complicated myriad of customs and other taxes placed on all goods and services. The VAT did succeed in taxing the large informal economy, estimated at between one-quarter and one-third of gross domestic product, and that led to an unexpectedly large government budget surplus that would help decrease by nearly half Croatia’s 12.5% current account deficit for 1997. In July the International Monetary Fund (IMF) warned Croatia to refrain from further wage hikes for government workers and suggested that the government place more restrictions on the surge of bank credits to household and corporate borrowers and hasten privatization of public enterprises. With unemployment stubbornly hovering at 17%, however, the government did not believe it could follow the IMF advice, particularly after February 20, when 10,000 people took to the streets in Zagreb demanding higher wages and condemning the government’s authoritarian style. Despite these problems, economic growth reached 4%, far below the string of four years of high growth but still respectable, considering the international financial turmoil and the uncertain banking sector. Inflation remained at under 4%, and currency stability was maintained. Tourism revenues grew a modest 6% over the previous year. Starting in June, the government privatized through vouchers $2 billion in state assets to some 300,000 citizens.

An agreement signed in early December between Croatia and Bosnia and Herzegovina provided the latter with port access to the sea at Ploce. Soon afterward Yugoslavia opened a consulate in Vukovar, a Croatian town bordering Serbia, further normalizing relations between these former enemies.